United States General Accounting Office

GAO Testimony

Before the Subcommittee on National Security,

International Affairs, and Criminal Justice, Committee on

Government Reform and Oversight, House of

Representatives

For Release on Delivery

Expected at

10:00 am, EDT

Tuesday,

July 30, 1996

DOD BULK FUEL

Budgeting for Bulk Fuel and

Other Operation and

Maintenance Activities

Statement of Sharon A. Cekala, Associate Director,

Military Operations and Capabilities Issues, National

Security and International Affairs Division

G O A

years

1921 - 1996

GAO/T-NSIAD-96-208

Mr. Chairman and Members of the Subcommittee:

We appreciate the opportunity to be here today to discuss our work on the

military services’ budgeting for bulk fuel.1

 The bulk fuel budgeting issues I

will describe, however, may be symptomatic of a larger issue relating to

how the services estimate requirements for operation and maintenance

(O&M) activities.2

 Our work has shown a recurring pattern of the

Department of Defense (DOD) estimating that it needs more funds than it

obligates for some O&M activities.3

My statement focuses on

• the services’ use of O&M funds and their latitude in obligating the funds,

• specific overestimating of funds needed for bulk fuel, and

• bulk fuel as one example of the services’ overestimating their needs for

some activities within the O&M account.

The O&M Budget and

What It Provides for

The O&M appropriation provides the services with funds to carry out

day-to-day activities such as the recruitment and fielding of a trained and

ready force, equipment maintenance and repair, child care and family

centers, transportation services, civilian personnel management and pay,

and maintenance of the infrastructure to support the forces.

The services have a great deal of flexibility as to how they obligate O&M

funds,4 and we recognize the need for flexibility. We also recognize that

the amounts obligated will rarely agree with the estimated requirements

reflected in the budget request. However, the issue is to what extent DOD’s

budget estimates should reflect actual experience. For example, our

analysis of certain O&M activities shows a pattern of the estimated

requirements being more than what is obligated. Conversely, for other O&M

1

DOD Bulk Fuel: Services’ Fuel Requirements Could Be Reduced and Funds Used for Other Purposes

(GAO/NSIAD-96-96, Mar. 28, 1996).

2

The words “activity” and “activities” are generally used in this statement to refer to “items of

expense,” which is the term used in appropriations law.

3

In our analysis of O&M activities below the level of detail shown in the budget, we compared the

amount obligated to DOD’s estimated requirements. We were unable to compare the obligated

amounts to the amounts appropriated for the O&M activities because that information is not available

at the DOD or services’ headquarters level.

4

Some limitations have been imposed on this flexibility. If a service moves more than $20 million from

one budget activity to another, for example, from operating forces to mobilization, the move is subject

to normal reprogramming procedures. If a service moves $20 million or more from certain subactivity

groups within a budget activity, for example, from combat units to depot maintenance, it is required to

provide prior written notification to the congressional defense committees.

Page 1 GAO/T-NSIAD-96-208
activities, our analysis shows a pattern of the estimated requirements

being less than what is obligated. When these patterns consistently appear,

a question should be raised as to whether the budget estimates accurately

portray the services’ needs.

Determining Bulk

Fuel Requirements

The Defense Fuel Supply Center (DFSC) has the primary responsibility for

providing the services with the fuel they need. DFSC purchases the fuel

from commercial sources and sells it to the services. Although DFSC is the

primary source, the services also buy a small amount of fuel directly from

commercial sources.

As part of our annual review of the services’ fiscal years 1996 and 1997 O&M

budget requests, we compared the estimated requirements for bulk fuel as

reflected in the O&M budget requests to the amount of fuel DFSC estimated it

will sell to the services. Our reviews show that DFSC’s planned fuel sales to

the services were less than what the services estimated their requirements

to be in their budget requests.

The services determine their fuel requirements and budget requests based

on flying hours, steaming days, tank training miles, and base operation

needs. The services advise DFSC of their requirements so DFSC can

determine the amount of fuel it will need to satisfy the services’ operating

requirements and for war reserves and its other customers’ needs. DFSC

estimates the amount of fuel the services will buy from it based on the

services’ historical usage data adjusted for events expected to occur

during the fiscal year.

Services Overestimate

Bulk Fuel Needs

In their budget submissions for fiscal year 1996, the services estimated

their requirements for bulk fuel to be $4.12 billion: $4.01 billion for fuel

from DFSC and $107 million for fuel from commercial sources.

In February 1996, DFSC estimated that the services’ fuel purchases in fiscal

year 1996 would be about $3.57 billion, or about $440 million less than the

approximately $4 billion the services had estimated. The services’ budget

estimates and DFSC’s estimated sales are shown in the table 1.

Page 2 GAO/T-NSIAD-96-208
Table 1: Bulk Fuel Requirements in the

Services’ Fiscal Year 1996 Budget

Requests and DFSC Estimated Sales

to the Services

Estimated

requirements in

February 1995

budget submission

DFSC estimated

sales as of

February 1996 Difference

Numbers in millions

Service Barrels Dollars Barrels Dollars Barrels Dollars

Army 10.5 $316.9 7.5 $236.2 3.0 $80.7

Navy 46.5 1,461.2 39.3 1,236.6 7.2 224.6

Air Force 69.7 2,235.2 66.7 2,100.9 3.0 134.3

Total 126.7 $4,013.3 113.5 $3,573.7 13.2 $439.6a

aThe overestimated fuel requirements affect the O&M appropriation as well as other

appropriations. Neither we nor DOD could determine the specific amounts for each appropriation.

It should be noted that DFSC’s February 1996 estimate of fuel sales to the

services is lower than the sales estimated when the services submitted

their budget requests in February 1995. In our report on potential

reductions to the fiscal year 1996 O&M budget, we estimated that the

services would purchase about $3.7 billion of fuel in fiscal year 1996, or

about $330 million less than the services’ estimated requirements.5

DOD officials do not agree that their bulk fuel budget requests were

overstated. In commenting on our March 1996 report, they said that fuel is

a major element of logistics preparedness and is budgeted in O&M accounts

so that they can respond to changing requirements. DOD also said that the

amount of fuel used was greater than the amount requested for 2 of the

past 4 years (fiscal years 1992-95). As a result, DOD did not agree with our

suggestion in the report that funds for bulk fuel be reduced.

We agree that fuel requirements change, and we have considered those

changing requirements in our analysis of bulk fuel. For example, when we

reviewed the fuel budget request in May and June 1995, we estimated the

services’ purchases for fiscal year 1996 as $116.8 million barrels of fuel for

about $3.7 billion. In our March 1996 report, we noted that DFSC’s estimate

of the services’ purchases for fiscal year 1996 was reduced to 113.5 million

barrels at a cost of about $3.6 billion. Therefore, the difference between

the services’ budget estimates for fiscal year 1996 and DFSC’s estimates had

increased.

5

1996 DOD Budget: Potential Reductions to Operation and Maintenance Program

(GAO/NSIAD-95-200BR, Sept. 26, 1995).

Page 3 GAO/T-NSIAD-96-208
We do not agree, however, that the services used more fuel in 2 of the past

4 years than was reflected in the budget requests. The documentation

provided by DOD to support its position showed that the services had used

more fuel than was reflected in the budget requests due to fuel used during

contingency situations. DOD based its position on a comparison of total

fuel used—for normal operational needs and contingency situations—to

the budget request, which did not include supplemental funds used to

finance contingency operations.

Additionally, the services return fuel to DFSC for credit.6

 However, it is

unclear whether the services consistently consider the returns or only

gross purchases when they estimate their annual fuel needs. For fiscal

year 1996, DFSC estimates that the Navy and the Air Force will return about

6 million barrels for credit valued at about $189 million. According to DOD

officials, the fuel credits represent funds that the services then obligate for

other purposes.

Our analysis of the estimated bulk fuel requirements reflected in the fiscal

year 1997 budget requests shows that the services continue to

overestimate their needs. The services estimated their requirements as

117.8 million barrels of fuel at a cost of about $3.8 billion. DFSC estimates

that the services’ fuel purchases will be about 113.2 million barrels, costing

about $3.6 billion, or about $183 million less than the $3.8 billion the

services requested. (See table 2.) However, the difference between the

services’ and DFSC’s estimates is not as significant as in fiscal year 1996.

DOD, the services, and DFSC have worked to ensure that the estimates are

more closely aligned. For example, the Navy changed the basis for its

requirements from a 4-year average to a 3-year average and recognized

changes in deployment patterns of its military sealift ships. This had the

effect of reducing the average use to reflect current consumption and

operating patterns.

6

As ships and aircraft are readied for maintenance, the fuel tanks are emptied and the fuel is returned

to DFSC for credit.

Page 4 GAO/T-NSIAD-96-208
Table 2: Bulk Fuel Requirements in the

Services’ Fiscal Year 1997 Budget

Requests and DFSC Estimated Sales

to the Services

Estimated

requirements in

February 1996

budget submission

DFSC estimated

sales as of May

1996 Difference

Numbers in millions

Service Barrels Dollars Barrels Dollars Barrels Dollars

Army 9.2 $294.8 8.2 $261.7 1.0 $33.1

Navy 43.7 1,398.3 42.5 1,356.6 1.2 41.7

Air Force 64.9 2,102.9 62.5 1,995.0 2.4 107.9

Total 117.8 $3,796.0 113.2 $3,613.3 4.6 $182.7a

aThe overestimated fuel requirements affect the O&M as well as other appropriations. Neither we

nor DOD could determine the specific amounts for each appropriation.

Overestimated

Requirements Are Not

Limited to Bulk Fuel

As I mentioned at the beginning of my statement, overestimating for bulk

fuel requirements may be symptomatic of a larger issue. In other reports,

we identified similar patterns of differences between estimates reflected in

the services’ budget submissions and ultimate obligations for particular

O&M activities.7

We recognize that DOD has faced and will continue to face unplanned for

contingencies that it will have to pay for by moving funds. However, we

have also noted that certain O&M activities are consistently overestimated,

while others are consistently underestimated. For example:

• In our April 1995 report on Army training, we pointed out that about

$1.2 billion, or one-third, of the $3.6 billion designated for operating tempo8

 for U.S. Forces Command and U.S. Army, Europe, forces in fiscal years

1993-94 was used to fund other O&M activities. These activities included

base operations, real property maintenance, and contingency operations in

Somalia and Haiti. According to Army officials, funds were moved from

operating tempo to the other O&M activities because the activities were

either unfunded (contingency operations) or underfunded (base

operations and real property maintenance).

7

Army Training: One-Third of 1993 and 1994 Budgeted Funds Were Used for Other Purposes

(GAO/NSIAD-95-71, Apr. 7, 1995); Depot Maintenance: Some Funds Intended for Maintenance Are

Used for Other Purposes (GAO/NSIAD-95-124, July 6, 1995); and Operation and Maintenance Funding:

Trends in Army and Air Force Use of Funds for Combat Forces and Infrastructure

(GAO/NSIAD-96-141, June 4, 1996).

8

Operating tempo is the pace of unit training that the Army believes it needs to conduct to maintain its

fleet of tracked and wheeled vehicles at a prescribed readiness level. Operating tempo funds cover the

cost of fuel, reparable spare parts, and consumable spare parts.

Page 5 GAO/T-NSIAD-96-208
The use of operating tempo funds for other O&M activities is an issue that

we have repeatedly pointed out in our annual O&M budget reviews. The

Army requests and receives funds to operate its combat vehicles at 800

miles per vehicle per year to achieve a prescribed readiness level.

However, since fiscal year 1992, the Army has consistently operated at a

reduced rate—about 630 miles per vehicle per year in fiscal year

1995—and obligates the remaining operating tempo funds for other O&M

activities. In spite of operating at a reduced rate, reported readiness levels

have not suffered.

• In our July 1995 report on depot maintenance, we reported that during

fiscal years 1993-95, the Army and the Navy received about $591 million

more than they requested for depot maintenance. A comparison of the

amount of depot maintenance work done to the amount of funds

requested and received shows that for fiscal years 1993-94, the services

obligated about $485 million less for depot maintenance than the amount

requested and about $832 million less than the amount received. The funds

requested but not obligated for depot maintenance were obligated for

military contingencies and other O&M activities such as real property

maintenance and base operations.

According to service officials, the depot maintenance backlogs are

manageable and represent an acceptable minimal level of risk. They

attribute the lack of adverse effect to the funding levels; the levels of depot

maintenance work done; and the reductions to the force levels, which

have made more equipment available to the remaining forces.

These examples are typical of what we recently reported on O&M funding

trends. In our June 1996 report, we showed that the estimated needs

reflected in the Army’s and the Air Force’s budget requests for many O&M

activities were often overestimated for fiscal years 1993-95 when

compared to the amounts they obligated for those activities. This pattern

was particularly true for the Army, which obligated less funds for its

combat units than it estimated it would need and less than the amount

provided in the conference reports to the appropriation acts for this

activity. Conversely, the Army obligated more than it estimated it would

Page 6 GAO/T-NSIAD-96-208
need for infrastructure and management activities, again obligating more

than cited in the conference reports.9

For fiscal years 1993-95, the amount of funds the Army obligated for O&M

activities related to combat forces and support of the forces was

$900 million less than the $11.9 billion estimated requirements reflected in

its budget request. When training and recruiting funds are also considered,

the Army obligated about $1.3 billion less than the estimated requirements.

In total, about 64 percent of the Army’s fiscal years 1993-95 O&M budget

requests was for infrastructure-type functions like base support and

management activities. However, about 70 percent of the Army’s O&M

funds were obligated for these purposes.

In addition, funds obligated for an O&M activity may not reflect the actual

costs of that activity. Each of our previous Chief Financial Officers Act

financial audits of the military services shows that DOD decisionmakers did

not have reliable cost information available to consider in their

deliberations. For example, our work showed that the Army could not

generate data on actual costs incurred for Desert Shield and Desert Storm

operations. Instead, the Army reported obligations from its existing

systems. As a result, the costs of materials consumed during Desert Shield

and Desert Storm—but obligated in a prior period—were not included in

costs reported on an obligational basis.10

This represents another example of the need for effective financial

management systems throughout DOD. Since our February 1990 report,11

which was our first attempt to audit the fiscal year 1988 financial

statements of the Air Force, we have noted that DOD’s systems do not

effectively account for and control actual costs incurred. In

November 1995, we expressed our concern over the pace of needed

systems improvements.12 Until DOD takes action to correct these systems

9

In our analysis, we categorized O&M activities as being related to combat forces and support of

forces; training and recruiting; base support; or management, command, and servicewide activities.

These categories were based on criteria developed by the Institute for Defense Analyses, the Joint

Chiefs of Staff, and the Office of Program Analysis and Evaluation. These categories do not always

agree with those the services used in their budget requests.

10Financial Management: Immediate Actions Needed to Improve Army Financial Operations and

Controls (GAO/AFMD-92-82, Aug. 7, 1992).

11Financial Audit: Air Force Does Not Effectively Account for Billions of Dollars of Resources

(GAO/AFMD-90-23, Feb. 23, 1990).

12Financial Management: Challenges Facing DOD in Meeting the Goals of the Chief Financial Officers

Act (GAO/T-AIMD-96-1, Nov. 14, 1995).

Page 7 GAO/T-NSIAD-96-208
deficiencies, its decisionmakers will continue to receive inaccurate and

unreliable data from their systems.

Conclusions We fully recognize that because of unforeseen circumstances and changes

in funding priorities, the services need flexibility in how they obligate their

O&M funds. And, we know that the amounts obligated will rarely agree with

the estimated requirements reflected in budget requests. However, we also

believe that accurate budget estimates are an essential component of fiscal

responsibility and that identifying and fully understanding variations—and

recurring patterns among variations—between estimates and actual

results will enhance and facilitate budget decision-making.

Mr. Chairman, this concludes my prepared statement. I would be pleased

to answer any questions that you or members of the Subcommittee may

have.

(703170) Page 8 GAO/T-NSIAD-96-208
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